What's the ROI on a RFP? Expensive solutions are needed for only the most important expensive pr

Requests for Proposals (RFP) are expensive for both the vendor and the client. This heightens your team's need to have a clear idea of what your firm is trying to accomplish by acquiring a new product or service.

Is the problem you're trying to solve worth issuing an RFP? One way to approach better decision-making is to review the different types of purchases where a competitive selection process is warranted.

Replacement of an existing commodity service

Whether the Return on Investment (ROI) covers the cost of an RFP for these types of purchases depends upon the on-boarding and exit costs for the commodity being acquired. It also is important to provide a rationale for the actual savings that might be achieved through competitive bidding.

Our perspective is that replacing an existing commodity service doesn't warrant an RFP when switching costs and benefits are both low. If your commodity has high switching costs (such as complex data conversions, extensive regression testing, or the development and deployment of new procedures to a large audience), it is important to have an RFP that primarily focuses on these costly components of the transaction.

In these business cases determining the useful life of the new approach or expected duration of the relationship is necessary because these one-time costs are front-end loaded and the benefits arrive over time. Commodity replacement projects should have a low discount rate in the ROI analysis that reflects the fact that delivery risk and expected utilization are fairly certain.

In fact, the biggest driver for whether it is beneficial to evaluate alternatives relates to whether or not you are satisfied with the incumbent's service. If you are pleased, it is generally more productive to simply ask for a new, lower price on the basis that they aren't incurring any ongoing sales and marketing costs for your relationship.

An RFP is only useful if you are dissatisfied with current performance and you want to send a clear message to your supplier's management, not just your supplier's sales and service staff. RFPs consume a lot of vendor marketing resources and thus are very visible to senior sales management.

New products or services that meet short-term business goals

It is always useful to have a transparent rationale for picking a solution. However, when selecting a supplier to achieve a quick, short-term result, it is more important to quickly negotiate a contract with an acceptably-capable supplier rather than have an elaborate, lengt hy review of possibilities. Stating that you will put stiff penalties in the contract for non-performance will have the effect of raising the vendor price and securing the right vendor implementation team.

In a lengthier RFP process, all vendors will likely state they are fast and have time to point you toward clients that were served quickly, efficiently, and effectively. However, that could have been under ideal staffing situations, perhaps for a less complex scenario. Ironically, the most successful, competent, and fast-growing vendors are often the slowest to implement a new client. Why? They are in such high demand that they are simply out of experienced resources. For a fast-moving scenario, the newer or the second-best provider may be the best option for short-term goals.

So how do you determine ROI on a shortterm investment and opportunity? These analyses should have clear benefits that quickly have no impact if the delivery window is missed. The investment should be correspondingly smaller if there is a high risk of failure. The focus of the ROI calculation is on the timing of costs and benefits, not the discount rate.

Lastly, for these purchases, consider whether a lengthy RFP process uses up enough of the market window or savings opportunity. Will it increase the risk of the project by excessively reducing the time available for delivery? In these scenarios, a sensible procurement practice becomes a potentially catastrophic risk.

Organizations transformation or development of a new strategic capability

When building a business case for a far-reaching change that will alter how the firm operates, developing the RFP should be done in parallel. There are likely to be multiple scenarios and timelines and the combination of many factors makes it difficult to have a simple spreadsheet as is possible with the other prior examples.

For these major initiatives, developing the ROI model is the most critical step in securing commitment to results from internal staff. The RFP is used to secure an equivalent commitment to delivery from the vendor.

In short, your managers and key individual contributors should see the ROI and RFP as two sides of the same coin. Often, in order to narrow the potential paths and outcomes in the ROI analysis, it is useful to conduct a discovery engagement with the most promising supplier or by using a management-consulting firm with operations and technology depth in your space.

The RFP will become much more focused and your firm will get more relevant RFP responses to what is generally a shorter RFP when the business case is clear. Building a good business case means the investment will take place and all vendors and talented staff hate losing to the "do nothing" scenario most of all.

Bottom line

Determining the ROI of a project that involves procuring newservices or re-upping for existing ones is a necessary first step when determining how to do the procurement. Simple purchases with low return on investment because they represent a continuation of the status quo are really only useful when there are significant onboarding/ exit costs or when you are unhappy with the incumbent's performance.

Commodity replacement projects should have a low discount rate in the ROI analysis that reflects the fact that delivery risk and expected utilization are fairly certain.

Carriers, brokers and agents should avoid complex RFPs unless the purchase will be for a program that involves significant time and money or the development of a long-term asset that has significant exit or ownership costs. Examining the type of purchase or project under consideration and carefully looking at its high level ROI before beginning the procurement process is a best practice.

Russ Bostick and Donn Vucovich are the managing partners of MVP Advisory Group, a management consulting firm focused on developing and executing superior strategies for business and IT.

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